Why we should rip up our tax system

Written by John O’Connell is research director for the TaxPayers’ Alliance. He tweets at @jjpoconnell on 22 May 2012 in Diary

Diary

It’s time to be bold, argues the TaxPayers' Alliance. The organisation's research director talks about their 2020 Tax Commission report and why we should tear up our tax system and start again

George Osborne called our tax system a "spaghetti bowl" in 2010. He had a point. We have one of the world’s longest tax codes at over 11,500 pages, and this has real consequences for families and businesses in the UK. If someone sat down to design a tax system from scratch, they wouldn’t come up with the one we have now. It exists because of years of tweaking at the edges to raise more revenue from more and more people, and offering breaks to preferred industries.

So to fix it, we need to tear it up and start again. The TaxPayers’ Alliance joined forces with the Institute of Directors 18 months ago to set up the 2020 Tax Commission, and our final report was launched yesterday. The report calls for a Single Income Tax of 30%, which represents a tax cut for everyone.

Those on the basic rate of tax currently pay 40% when you add in both forms of National Insurance. Our rate would kick in after a big personal allowance of £10,000 too – which means families would keep more money in their own pockets. We also recommend a Family Transferable Allowance, where half a partner’s personal allowance could be transferred to their other half, along with 30% of a personal allowance per child.

The current punitive tax regime takes too much from businesses then hands it back out in grants. The abolition of the regional development agencies doesn’t seem to have curbed this madness and it’s one of the many reasons why UK businesses aren’t growing and hiring.

In the report, we also show how there is a top combined marginal tax rate of 95% for successful entrepreneurs on income earned, saved, invested in a company and passed on to children. At a time when we desperately need to encourage new businesses to form and grow, this is a massive disincentive for would-be entrepreneurs.

That’s why we have a revolutionary plan to replace corporation tax and capital gains tax with a tax on distributed income, at the Single Income Tax rate of 30%. Economic modelling suggests our proposal would increase business investment by 60% over the next 17 years. We also propose decentralising tax raising powers to local authorities, which the evidence shows boosts growth and improves public sector efficiency. Perhaps most important of all it would help those regions too reliant on the public sector to attract new businesses and create jobs.

We would also scrap stamp duty and inheritance tax. Our system would capture flows of income and tax them only once, at the same rate. No more hidden nasties when a relative dies or you want to buy a house and no more distortions that encourage avoidance.

The tax system is not just burdensome for families and businesses. It’s also a nightmare for the taxman to administer. The stories of HMRC bungles are all too frequent, but what’s more revealing is that the cost of collecting tax over the last 50 years has barely fallen.

In 1958, it cost £1.16 to collect £100 of tax revenue, and now that figure is just £1.14. The first hand held calculator was invented in the late 1960s, let alone the computers we are all used to nowadays. It’s absurd that this cost has not come down more drastically, and goes to show that the tax system gets far more complicated the more we treat it with sticking plasters.

It’s time to be bold. The 2020 Tax Commission report sets out a path for greater economic growth along with simplicity, transparency and fairness in the tax system. All we need is the political will to match.

John O’Connell is research director for the TaxPayers’ Alliance. He tweets at @jjpoconnell